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Wednesday, 20 July 2016

A Victorian Scandal: The Failure of the City of Glasgow Bank - Ann Swinfen

The near total collapse of the UK banking system in 2008 had
repercussions which are still very much with us today. But in case we should delude ourselves into
thinking that it was a unique near disaster, spare a thought for the
shareholders of the City of Glasgow
Bank in 1878. When their Bank collapsed,
no-one was there to bail them out with government money. Apparently unprotected by limited liability
legislation, the great majority of them faced bankruptcy and destitution. True
– the directors and officers faced trial on charges of fraud, but the remarkably
lenient sentences handed down can have been poor compensation for the real
victims of the affair.

The failure of the City of Glasgow Bank with
estimated debts of £10 million, announced in the press on 2nd
October, 1878, seems to have caught almost everyone by surprise. According to
the Irish Freeman’s Journal, ‘The failure of the Glasgow City Bank for
ten millions is a disaster as unequalled in magnitude as it was wholly
unexpected.’ The Journal went on to
point out that according to the previous week’s edition of the Investor’s Monthly Manual, all the signs were that the bank was in a healthy
state. Its stock was given as £1
million, the share price stood at £237 per £100, and it paid dividends of
12%. But now that the disastrous news
had broken, there was general concern to avoid a widespread panic. While the other Scottish banks were unwilling
to come to the Bank’s assistance, they did announce they would accept its notes
in current circulation. The Scotsman hastened to
assure its readers that ‘the circumstances of the suspended bank were entirely
exceptional, and that its status was not comparable with that of the other
Scotch banks’. How the unhealthy state of its affairs had been kept secret
until now was difficult to explain, but the paper assumed that it ‘was not
before the minds of the shareholders, and can hardly have been known to the
directors’.

The City of Glasgow
Bank had been
established in 1839, with 779 subscribers and a capital of £656,250. It was its
regular practice to publish the annual balance sheet for shareholders in June
each year, and the accounts for 1878 showed healthy deposits of £8,000,000 and
the existence of 133 branches around the country. Capital, reserves, and undistributed profits
totalled £1,600,000, and a dividend of 12% would be paid to shareholders. The announcement less than four months later
that the directors had decided to close the bank naturally sent shock waves
throughout not just the city of Glasgow, but across Scotland and beyond. It is estimated that hundreds of businesses
were brought down by the bank failure, and the 1200 shareholders and their
families were made destitute. At a meeting of the liquidators held at the
beginning of January, 1879, it was decided to pay a dividend of a mere five
shillings (later raised to 6/8d) in the pound. At the same time all six of the
Bank’s directors were served with indictments, and the trial date set for the
20th January.

Before the trial could take place, sympathisers with
the shareholders met to discuss ways of providing some financial relief for
those affected. These schemes included a controversial plan for a lottery,
designed to raise a total of £6 million, of which £3 million would go to the shareholders.
They and their supporters saw this as the only way to solve their problems. At
a meeting of ‘influential men’ in Glasgow, Sir James Watson referred to the bank failure as ‘a national
calamity, so ruinous to its innocent shareholders and their families, and so
disastrous in its effects on the community at large, that it demands and
justifies exceptional modes of relief’.
Others saw it differently, and the plan was roundly condemned in the
pulpits and the press of the day. ‘Many
people, we are sure,’ asserted an editorial in the Leeds Mercury, ‘must have been inclined to regard the first
announcement of the proposed lottery in aid of the shareholders in the Glasgow
City Bank as
an ill-timed hoax. The suggestion of
such a scheme was, indeed, so outrageous that it is astonishing that anyone
could be found to discuss it seriously.
Yet we now know that the proposal has been received with extraordinary
favour in Scotland.’
The writer was reassured, however, by the intervention of the Law Officers,
from whom the promoters had received a discreet hint that what they were
planning might well fall foul of the relevant legislation, and it is a fact
that the scheme was shortly to be abandoned.

In the meantime the directors and manager of the City
Bank had
been removed from where they were lodged in Glasgow Prison, and conveyed with
elaborate secrecy to Edinburgh, and the Calton Jail. The succeeding trial was to last for
eleven days, in the course of which the incompetence or worse of the manager,
Stronach, and his fellow directors was shown in
high relief.

The trial was presided over by the Lord Justice Clerk,
Lord Moncreiff, but his contribution to the eventual outcome was greater than
that of a mere chairman of the proceedings.
The issue of whether the directors, or some of them, were guilty of an
actual crime, or merely of professional incompetence, lay at the heart of the
affair. There was also a question as to
whether they might in fact succeed in getting off scot-free on a
technicality. Two days before the trial
was due to open, the Graphic advised its
readers of a rumour ‘unfounded we hope, that the directors of the Glasgow City
Bank are
likely to be acquitted in consequence of a flaw in the indictment’.

Indeed before the trial proper, one entire session was
taken up by legal argument challenging the ‘relevancy and non-specification’ of
the charges in the indictment. The
following day, to a Court which ‘was again crowded, but not inconveniently’,
Moncreiff returned to give his and his colleagues’
decision on the issues raised by counsel for the defence. He explained to the court that the question
they had had to decide was whether the indictment contained facts sufficiently
relevant to go to proof before a jury. While many of the questions raised by
counsel for the defence involved ‘considerations of very great weight’, these
should most properly be dealt with when they came to investigate the facts of
the case.

The real issue, however, was that of criminality, in
particular in relation to the first charge in the indictment. This charge – of
issuing false statements and balance sheets – had been withdrawn by the Lord
Advocate, and it was now argued that the charge of
misrepresentation of the assets and liabilities was in a similar position, and
ought to be deleted. The Court held,
however, that ‘the charges respecting the assets and liabilities were matters
of proof, and not of relevancy, but there was no doubt that it would be
necessary when the facts of the case came to be proved, to add to the
illegality of the accounts charged, some element of bad faith, or guilty
knowledge, or of some fraudulent intent. This was an elementary principle, and
was essential to establish the crime itself.’

It would not have been enough to base the charge
simply on the obligation of directors not to allow overdrafts without security
– ‘unless there had appeared in the charge something alleging breach of faith’.
Evidently the indictment itself was less than explicit on this matter of bad
faith or criminal intent, and Moncreiff remarked that ‘he could have wished that the
charge had been more specifically expressed…..but on further consideration he
found words in the indictment which might be taken to override all the facts
alleged, and to raise the elements of bad faith throughout the whole of these
transactions…..the charge was clear that the prisoners had made use of their character
as directors to obtain advances in regard to moneys entrusted to them’, and
this was sufficient to justify an investigation by a jury’. Without this
conclusion, the case against the directors would almost certainly have
collapsed before it came to trial.

And so the case got under way, the prosecution being
conducted by the Lord Advocate and
the Solicitor-General for Scotland, with 14 ‘legal gentlemen’ appearing for
the defence. The defendants faced a
total of 17 charges, including misrepresentation of assets and liabilities,
overdrawing private accounts, and purloining of funds belonging to depositors.
The directors had all made declarations before the Sheriff of Lanarkshire
denying the charges, though the terms of their statements cannot have impressed
their customers with their attention to the affairs of the bank.

Mr Potter, who was to be sentenced to eighteen
months imprisonment, claimed to have been deceived by the manager, Stronach. Robert Salmond claimed to have been absent when the last
balance sheet was prepared, but signed it in the belief that it was a true
representation of the position of the bank.
Robert Taylor denied all misrepresentation or
concealment. He attended all weekly
meetings of the directors, and ‘considered that by doing so he discharged his
duty without himself examining the books’. Henry Inglis had
been absent from board meetings through illness, but had complete faith in the
bank officials. John Innes Wright, whose firm had received very large
advances from the Bank, alleged that although he was a member of the board, he
did not take an active part in the management but relied on the experience of
his fellow directors. Robert Stronach, the manager, wisely declined to make any
statement with regard to the charge of theft.

Upwards of 150 witnesses were to be called, but of
these the most damning from the point of view of the defence were Dr Macgregor, an independent accountant called in by
the directors to advise on the preparation of the balance sheet shortly before
the stoppage, and one William Morrison, formerly a clerk at the bank, but since
1871 its chief accountant. It was one of Morrison’s responsibilities to prepare the draft
annual balance sheet for submission to the manager. In his evidence he claimed that for the June
1878 document, he had prepared the draft in accordance with the books of the
bank, but then altered it under instructions from Stronach and
Mr Potter. As a result, the amount of deposits
declared in the public balance sheet of 1878 was given as £8,102,000,
misrepresented to the tune of £740,000.
The bank notes in circulation were incorrectly stated to the amount of
£89,000. The outstanding drafts were falsely stated to the extent of £410,000.

‘These understatements were made by the direction of
Mr Stronach, the manager, and were marked on the
abstract by red ink.’ And so it went on.
The credit accounts were falsely stated to the amount of £3 million; the cash
in hand overstated by £200,000. False
balance sheets had been prepared not only for 1878, but also for the two
previous years of 1876 and ’77. The only small glimmer of light relief was
afforded by Morrison’s near namesake, William Morris, whose monthly task it was to prepare
statements of credits given to one of the bank’s largest customers, Smith,
Fleming and Co. Sometimes these statements were accompanied by securities, sometimes
not. In one case the security of an advance to the company had been six live
elephants in Rangoon!

Dr Macgregor, as an outside consultant, had no need for
concealment. He spoke of his meeting with the directors, at which the general
affairs of the bank were discussed – a discussion in which Stronach took
very little part, seeming to be ‘entirely overcome’. Having carried out his
investigation Macgregor concluded that several of the directors and
some of the firms with whom they did business had largely overdrawn their
accounts. In his opinion the bank was
now hopelessly insolvent – the deficit according to his calculations being of
the order of six and a half million.

And so the trial ground its way on for several more
days. The Court heard from shareholders
and depositors, from the prosecution and the defence. For his part the Lord
Advocate announced on the 27th that he had
withdrawn the charges of theft and embezzlement. On January 30th,
the Dean of the Faculty rose
to speak on behalf of the defence – a speech of great power, and one which had
a greater effect on the jury than any other. According to the Glasgow Herald, the speech was ‘courageous and skilful, and
had the verdict been given immediately on the conclusion of his speech, the
impression was that every one of the panels [defendants] would have been set
free.’ The Dean was
able to exploit weaknesses in William Morrison’s evidence, upon which the prosecution had
largely relied. ‘As the case stands’, the paper concluded, ‘a great deal
depends on the summing up of the Judge.
It is freely said that a powerful charge made either in one direction or
another would, as matters stand at present, take the jury along with it to a
verdict either of “all guilty” or of all “not guilty”, or at least “not proven”.’

Moncreiff’s address to the jury received widespread
praise from the press. The Sheffield and
Rotherham Independent described it as
‘an able and exhaustive summing up of the whole case’. The address lasted for
four hours, and began with an admonition to the jury to put out of their minds
the ‘excited comments out of doors’ occasioned by the fact that the failure of
the bank had reduced hundreds of shareholders from affluence to poverty, and
concentrate wholly on the facts given in evidence. Despite the length of the
address, it succeeded in reducing the complexity of the case to a few simple
propositions. According to him, the only charge now preferred against the
prisoners was that they had falsified the balance sheets of the bank from 1876
to 1878, and that they had done so with a fraudulent intent to deceive the
shareholders.

For the jury to come to a decision on this issue, he
put to them three simple questions – first, whether the balance sheets were
false; second, whether the prisoners, or any of them, knew that they were
false; and third, whether the circulation and publication of the balance sheets
had been done with fraudulent intent. He further reduced the burden on the jury
by suggesting that they concentrate on just two of the amounts in the balance
sheets which were alleged to be false. He made some criticism of Morrison’s evidence, which had sometimes been
confused and contradictory, but if his evidence was to be believed, then the
accounts had been altered with intent to deceive. Evidently the summing up succeeded in
enabling the jury to come to a speedy decision. After retiring for just two
hours, they returned with a verdict. ‘We unanimously find Lewis Potter and
Robert Summers Stronach guilty of all the charges as libelled; and
John Stewart, Robert Salmond, John Innes Wright, Henry Inglis, and William Taylor guilty of using and uttering false
balance-sheets or statements of the state of the City of Glasgow Bank.’

Potter and
Stronach were
each sentenced to eighteen months imprisonment.
The punishment would have been much more severe, if the jury had found
that the crimes they had committed had been carried out for personal gain,
rather than, as had been argued on their behalf, for the benefit of the bank. The
remaining directors, who had been convicted of uttering false balance sheets,
but not actually of fabricating them, each received eight months. Even to some
contemporaries, these sentences seemed over lenient. The Economist,
for one, thought them to be inadequate, even taking into account the three
months the directors had already served before the start of the trial. The Statistagreed. ‘So far as the sentence goes, it would appear to be a safer
thing to make away with six or seven millions of money, and thereby to filch
from thousands of affluent families everything they possess in the world, than
to pick a pocket of a few pence.’ It would have been interesting to know what a
Dundee mill girl, whom Moncreiff had
sentenced to eight years in prison back in 1870 for stealing a silver watch and
some clothing from her landlady, might have thought of this outcome.

2 comments:

What a fascinating post. I was immediately thinking of the failure of the bank in 'Cranford', and I did know that Victorian history was bedevilled with bank failures and ruined rentiers, but to have it all set out so very clearly, including the criminal behaviour of the bankers, is very informative. I do get the feeling that little has changed, though. BHS springs to mind.

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